Australia coal sector recovery seen taking months

Australia’s $US50 billion coal export industry is likely to take months to recover fully as miners face torrential rains and flooding that have nearly halted coal production and infrastructure, a Reuters snap survey showed.

In the survey of industry analysts on Thursday, most said it would take a month or more for Australia’s coal industry, which contributes two-thirds of global coking-coal exports needed to make steel, to return to pre-flood levels.

“We could potentially see lost production of an entire quarter in Queensland, if the rains persist at these very strong levels until the end of the wet season in March," UBS analysts Tom Price told Reuters.

“Best case scenario is one to two weeks, if the rain stops right now and doesn’t return for the foreseeable future," he said.

But with Australia experiencing the worst floods in at least 50 years just as the wet season begins, and the nation’s weather bureau forecasting more rains, the prospects for a quick recovery are dim.

“Some miners suggest it could take as long as 18 months for thermal and coking coal supplies to fully recover, while salvage costs will again be huge," London-based Credit Suisse research analyst Melinda Moore said in a note earlier this week.

The snap survey by Reuters showed the median expectation among analysts was that recovery in output to pre-flood levels would take about 3 months.

Coking or metallugical coal prices have jumped as Australian supplies become more scarce, with spot prices for hard coking coal already near $US250 per tonne.

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Analysts forecast coking coal prices between $US240 per tonne and $US300 per tonne for the second quarter of 2011, up from the current quarterly contract price of $US225 per tonne.

So far, there has been little indication from miners when production and exports will resume normally. According to the Reuters survey, analysts differ widely on how much export capacity is online, with estimates from 40 to 80 per cent.

Miners Anglo American, Rio Tinto, Xstrata and BHP Billiton have all been forced to declare force majeure, which companies can invoke to release them from delivery obligations, due to the flooding.

Although it is not unusual for Queensland’s wet season to disrupt mining, the rains began early this year, making it hard for coal producers to build stockpiles to last through the monsoonal first quarter.

“This time around, it’s happening a lot earlier, it looks a lot worse, and we’re still seeing more rainfall," said Andrew Harrington, an analyst at Patersons Securities in Sydney.

WORSE THAN 2008?

The floods this year may hit the industry harder than they did in 2008, when monsoonal rains severely disrupted coal operations and caused huge coking coal price hikes.

“A bigger weather disruption and lower emergency stocks this time around suggests the total export impact will be considerably larger - potentially double the export drop of 2008," said Mark Pervan, a commodities analyst with ANZ in Sydney.

He added that in 2008 mine operations were impacted for two to three months and export volumes fell 17 per cent in the first quarter compared to the same period the previous year.

In 2008, flooding kept some mines offline as much as six months, but many others were able to start producing within four to six weeks, according to Patersons’ Harrington.

Prices in 2011 may not become as inflated as in 2008 due to shorter coal contracts.

In 2008, coking prices soared to $US300 per tonne for an annual contract, but quarterly pricing may mean that prices are more dynamic.

“This time, prices are set on a quarterly basis and quickly reflect changes in market dynamics through the link to a spot based coal price index," Morgan Stanley Research said in a note.